Council Hears Details Of Public Safety Retiree Option

OCEAN CITY – With budget discussions looming, city officials reviewed a retirement option for the town’s bargaining units.

According to Financial Administrator Martha Lucey, Ocean City’s Deferred Retirement Option Program (DROP) is an arrangement in which a sworn police officer, who would otherwise be eligible to retire and receive a pension under the town’s Maryland Public Safety Employees Pension Plan, decides to continue to work up to a maximum of three years. By doing so, instead of having the continued earnings and additional years of service taken into account of his or her defined benefit plan, the officer accepts the pension benefit amount at the DROP eligibility date. The pension benefit is credited monthly into an account within the pension plan. The amount in the account plus interest at a six-month CD rate is paid to the officer when the officer eventually retires.

When the officer retires, he or she has two options in receiving the DROP account, either a cash lump sum, a rollover to a custodian of an eligible retirement plan or have actuarial equivalent value of the DROP account paid monthly and added to the monthly pension benefit payment.

Council President Jim Hall explained that a review of the DROP program was scheduled for new council members to be brought up to date with the pension option.

“It’s a management tool in the tool box … it’s something to think about as we go into the budget,” he said.

Councilman Joe Hall added that Ocean City already has one bargaining unit, the police department’s Fraternal Order of Police (FOP), and another bargaining unit, the fire department and EMS, which are interested in the program.

“This discussion today was making sure that the council understands that at whatever point we go into negotiations with the bargaining unit that desires the program, that you can weigh what is the best interest of the citizens on that,” Joe Hall said.

Lucey said that DROP should be used as a management tool and not an employee benefit. She explained that there is a considerable variation of age and years of service among EMS and Fire Marshal employees. If DROP is available, nine employees would be eligible for special DROP, which is a one-time entry window for police officers with over 25 years of service to enter the program when the ordinance was passed.

Lucey added that two employees will have the opportunity to enter DROP in 2013, three in 2015 and three in 2016. Three years of payments from the plan to DROP accounts would average $143,000 per employee.

Ocean City’s DROP participation cannot provide actuarial gain since it has a maximum benefit at 25 years. However, other area’s DROP plans do provide the opportunity for actuarial gain because the longer an employee works the larger the pension benefit becomes.

Lucey used Howard County, Md. as an example. A retiring officer receives 50 percent of pay at 20 years, but 80 percent of pay after 30 years. As far as their plan goes, an actuarial gain is received if the employee retires early and takes the lower service credit and benefit. While they are in DROP, employees cannot increase their pension percentage of pay.

Lucey explained that DROP plans are designed to be actuarially neutral. When an employee chooses the DROP option, it is exactly as if the employee has retired since actual monthly pension payments begin, except that the employee continues to contribute 8 percent of pay.

On the other hand, if an employee eligible to retire keeps working and contributes 8 percent but does not take the DROP option the pension plan experiences an actuarial gain since there is no need to provide pension payments for that year.

Lucey reviewed the history of the DROP program. It was originally designed by management to retain valued employees who were eligible to retire, and by municipal governments to encourage retirement. For example, DROP was used to encourage retirement when teachers and police officers were questioned in lacking the physical stamina to keep up with their jobs at later ages. School systems also used the program when teachers were sought to begin work at a lower pay grade with less benefits to replace more highly paid teachers.

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